Exploring the Four Levels of the Audit Process: Case Study

Internal Audit is an independent function that provides an objective confidence and consultancy activity to boost and add value by using an organization's operation. The auditors aim to help the Merami Berhad accomplish its objectives by evaluating the potency of its risk management, control, and governance processes by delivering a discipline, systematic methodology. The audit process is split into four levels which are organizing (Initial Review), Fieldwork, Audit Statement, and Follow-up Review. Among the main key objectives to handle an audit is to minimize the time and prevent disrupting ongoing activities.

As we are a public accounting firm for Merami Berhad for days gone by five years. Meramin Berhad is a general population shown company, whose sales for the entire year 2009 were over RM 25 million. The audit fees we normally demand to Merami Berhad are RM 50, 000. Before an audit is given to staff, the auditor must consider a few matters such as the size of the company to be audited. If it's a Community Listed Company, three or four 4 staff will be needed. Besides that, the budget is vital as the auditor are always recommended to remain within the budget so that the audit fees is enough to protect all the price incurred especially the disbursements. The auditor also needs to consider about the deadline. An audit task usually has very restricted deadlines and for that reason staff must be sure that the Audit Report is posted to the Partner of Review promptly so that the putting your signature on of accounts is not delayed.

When the audit administrator assigns a job to the senior, the very first thing the senior does is to meet with his associates to go over about the job and also to delegate duties to the respective customers. The audit associate will normally be asked to get the previous year's document of the company from the filling room. The prior year file is often used as helpful information only. Staff should always tailor-make the audit for the entire year based on the events that happened during the year. Once the previous year's data file is retrieved, a fresh file will be opened up for the current year's audit.


Planning is vital as this is actually the first-time we understand Merami Berhad business and their adjustments in the company. Through the planning level of the audit, the auditorwill contact your client to notifythem of the next audit and also to schedule a period during the 12 months that is most convenient for the audit to start and happen. The auditor will send them a preliminary checklist. That is a list of documents (e. g. business charts, financial claims) that will assist the auditor find out about their device before planning the audit. After researching the info, the auditor will plan the review, execute a risk workshop primarily to identify key risks and increase risk recognition, draft an audit plan, and plan an opening appointment.

Engagement Letter

Merami Berhad is educated of the audit through anannouncement or engagementletter from the inner Audit Director. This notice communicates the scope and aims of the audit, the auditors allocated to the audit, the audit strategy used in the audit and other relevant information. This notice acts as a agreement which describes the tasks of the auditor and client to prevent any unneeded misunderstanding of what is expected or required of the other get together. The auditor and your client must also agree on the conditions of the engagement.

Opening Conference

Nearer the start of the audit, the auditor will arrange a meeting with Merami Berhad to discuss the scope and objectives of the audit. The beginning seminar should be held to gather information about the quest, critical processes, and control procedures of the machine to be used in the initial review process. The opening meeting will include mature management and any administrative staff that may be involved in the audit. Merami Berhad explains the unit or system to be evaluated, the organization, available resources (staff, facilities, equipment, money), and other relevant information.

The audit mature usually discusses with your client about the company's performance for the entire year in terms of increase or decrease in profitability. This may due to factors ranging from launching of services during the year to high-position staffs departing the business. These will all be recorded available Understanding Doc.

The interior auditor fulfills with the mature officer directly responsible for the unit under review and any workers he wishes to include. It is important that the client identify issues or regions of special concern that should be addressed. Enough time body of the audit will be identified, and we ought to discuss any potential timing issues (e. g. getaways, deadlines) which could impact the audit. The opening conference is an important part of a regular audit. It is an chance to establish the correct tone and start building good connections.

Preliminary Survey

In thisphasethe auditor gathers relevant information they have gained from the opening conference is employed together with other relevant information about the machine in order to secure a general overview of operations. He speaks with key employees and reviews information, documents, and other resources of information. This may include information on budgets and tactical plans as well as past audit reports. There are specific risks that the auditor will usually review to ensure they are being adequately managed and managed - these include financial deals, local risk management and business continuity planning.

Internal Control Review

All of the information is then used to make a preliminary diagnosis of the potential risks and settings for Merami Berhad product. The auditor will review the unit's inside control structure, an activity which is usually time-consuming. By doing this, the auditor runs on the variety of tools and ways to gather and evaluate information about the operation. The overview of internal controls helps the auditor determine the regions of highest risk and design exams to be performed in the fieldwork section. Inside the hobbies of quality and reliability, the Head of Internal Audit reviews this work and agrees the opportunity of work to be carried out.

Audit Program

Preparation of theaudit programconcludes the preliminary review period. The audit program establishes theproceduresnecessary to complete a competent and effective audit. It offers an in depth plan of the work to be performed as well as the steps required to achieve the audit goals. There must be sufficient aspect for less experienced staff to execute the steps nonetheless it shouldn't be overly complete whereby it might cause auditors to execute steps routinely and override their view.


Transaction Testing

Revenue Cycle

Sales method and cash receipt deal will be the 2 checking strategies under revenue routine.

Sales Procedure

A sales quotation offers a pre-sales processing environment which allows prospective buyers to examine the costs engaged for a conclusion of work. A sales quotation typically contains information like variety, item and its own description, device prices and etc. Many businesses cannot come with an upfront price for the service they offer. Thus, deal quotation should be provided by companies to its customers to provide them an estimate of the price involved.

In addition, a delivery order is written guidelines from a consignor or shipper of the delivery to a carrier or freight forwarder release a the shipment to the known as delivery party in freight-prepaid shipment. It allows direct delivery of goods to the carrier or warehouseman.

Invoices are essentially a detailed bill kept by distributors and outside dealer for goods or services rendered to an organization under sales technique. The doc may be called a "Sales Invoice", from the point of view of owner, or a "Purchase Invoice" by the buyer. An average invoice might list the number of each item, prices, billable time, service description and a contact address for repayment. While some expenditures may be paid via an accounts payable division by the shared deadline.

Besides, cash sales can be utilized in several different contexts. A cash deal has to do with the purchase of goods or services and includes the immediate possession of the new owner, with no delay in time between purchase and presuming full ownership in only about every situation. In the world of funding and in retail situations, people are take part in cash sales on the wait basis,

Segregation of tasks is critical to effective internal control. It reduces the chance of both erroneous and incorrect activities. The handling of cash receipts and accounting for such receipt need to segregate. That is to reduce the likelihood that errors will remain undetected by giving an accounting check within the receipt of cash. For example, those who cope with cash receipts would not have the expert to get ready or sign cheques, would not have access to accounting documents and wouldn't normally be engaged in reconciling loan provider accounts. If a person has access to both the cash receipts and the accounts receivable details, it's possible for cash to be diverted and the lack of profit the accounting details to be protected which can lead to robbery of the entity's cash. Within the other hand, for many who perform sales activity including those who maintain connection with customers and concern sales orders, wouldn't normally perform any credit approval, billing, shipping, credit memo, cash receipts and accounting activities.

Cash Receipt Transaction

Most business customers pay by cheque or electronically. Cash receipts are only given to recognize cash payments; that are rarely created by business customers. Cash register and lockboxes tend to be used as safeguards here. To be able to prevent fraud and error, different employees should be in charge of receiving and saving cash collections here.

The reason for preventing scam and mistake is the validity, completeness, timeliness, authorization, valuation, classification, posting and summarization. It's very important to the money receipt transfer.

The auditor can check once a month bank reconciliation to avoid any recorded cash receipts not deposited in order to guarantee the validity of the money receipt transaction. For example, misstatement in sales that may occur includes fictitious sales being registered in the accounts o f a normal customer.

Expenditure Cycle

There are two verifying procedures under expenditure cycle, which are purchasing method and cash disbursement business deal.

Purchasing Procedure

A purchasing business deal normally starts with a purchase requisition generated by a division or support function. A purchasing order is then your purchase of goods or services from a provider. When the products and services have been rendered, the entity data a liability to the provider and gives later.

Basically, there are three types of for sale transactions which will be the purchase of goods or services on cash or credit, repayment of the liabilities arising from such buys and go back of goods or services. The second type is cash disbursement business deal to clear liabilities caused by purchase of goods or services. The ultimate type is a purchase return transaction which involves the come back of goods recently purchased to supplier for cash or credit.

Good segregation of obligations must be done in order to avoid embezzlement or any fraudulent activities. Firstly, a purchaser who orders shouldn't be the individual who receives goods. This can prevent the customer from placing unnecessary orders and keeping the rest of goods. Next, somebody who purchases items should not be the person who creates the cheques for it. This can avoid the individual from creating orders and make obligations to fictitious companies. Then, the person who writes cheques should not manage the reconciliation. This is because no one will aware even if he writes cheques to himself or family members.

Cash Disbursement Transaction

Cash disbursement can be explained as paying out of funds in a discharge of a debts or expense. Transfer Related Audit Purpose (TRAO) is employed here to assessing the lifetime and quality of adjustments. The auditor's transaction-related audit targets follow and are strongly related to management assertion. That is because the auditor's major responsibility is to find out whether management assertions about financial statements are justified. These transaction-related audit aims help the auditor collect sufficient competent research required by the standard of fieldwork and make a decision proper evidence to build up for classes of deals with a construction.

In order to ensure the validity of the money disbursement purchase, the auditor studies the validity of purchase deals whether you can find any fictitious or non-existent purchases might have been registered in the client's information. Assets or expenditures will be overstated if fraudulent transactions are documented.

As for Completeness, auditor must ensure that purchase that is made in documented accordingly. If fail to do this will lead to understating of assets or expenditures, and the equivalent accounts payable may also be understated.

As for Timing, a timing error occurs if orders are not noted on the times the transaction took place.

As for Authorization, the person who has expert to approve purchase shouldn't get access to cash disbursement for the purchase.

As for Valuation, appropriate technique is utilized to calculate ventures and to review various reconciliations. The valuation of accruals depends upon the type and the nature of the accrued bills.

As for Classifications, the major issues related to the presentation and disclosure assertions are discovering and reclassifying any materials debits within accounts payable. For instance, segregation of buying and cash disbursement journal is vital to ensure that right amount would be allocated properly. If purchase ventures aren't properly classified, assets and expenses will be misstated.

As for Posting and summarization, control tools should be used to reconcile vouchers to the daily accounts payable listing or else the daily postings to the buys journal should be reconciled to the accounts payable subsidiary information.

Income Affirmation or Income and Reduction Account

First of most, the auditor should determine and try to find out the major changes or the changes that would have an effect on the normal relationship has been manufactured in the creation and sales area. Audit associate are responsible to take care of on find the significant adjustment in the policies of company that could affect the item mentioned in the income declaration. After analyze on such adjustment to ensure that no material error is available then it will continue proceed to the final stage of the audit section. For instance, significant changes in worker benefits might have an impact on salaries and staff compensation and also have an effect on the income assertion.

Other than checking out in the income affirmation of your company, the auditor would also check out the balance sheet on the possessions and liabilities. Prior to the auditor learn to work on it, a copy of client's balance sheet should be prepared to working papers.

There are steps of undertaking an audit on assets and liabilities. Auditors should categorize each item in the balance sheet appropriately to the audit checklist.


All of these are the the different parts of assets.

For Cash in Bank

To ensure the information that explained in the column of the total amount is complied exactly what it had in the bank, a confirmation question letter will be sent to all the related bank which the entity had working with within the financial period. Furthermore to get confirm to relevant loan company that the total amount in the lender of the company, the auditors can also get an chance to request the bank to provide other information such as the securities that the business performed in the safekeeping.

The response from the bank give the company a gold evidence to establish that cash at loan company that stated in the total amount sheet is complied with the real amount in loan provider at the total amount sheet date. While using cooperation of loan provider, the confirmation of cash on deposit provides facts to the existence of cash at loan provider and as to rights and obligations. If the balance per bank assertion is different, standard bank reconciliation would need to be done by the audit assistants.

For Consideration Receivable

A details set of account receivables balances of the client should be obtain before the auditor and access to the balance. The auditor will trace totals to comparative conclusion of accounts receivables balance and randomly select customers' bank account from the listing to send itemized claims to obtain the response or verification of the total amount. Review the confirmation replies notice from them and test accounts where there are no replies. Keep track with the potential bad debts to be written off, if exist, check the beginning balances again.

For Inventories

When inventory is materials to the financial assertions, the auditor must go to the entity's physical inventory keeping track of unless it is impracticable. Examine client's physical inventories matter determine if the client's keeping track of methods are effective. The goal of inventory attendance is to allow the auditor to acquire audit evidence regarding the life and condition of the inventory and consider when there is any obsolescence in it. The auditor may select a sample of inventory items from the client count data and trace those to the perpetual inventory information for verifying purposes.

For Prepayment expenses

Randomly choose the state receipts or documents that can support prepayment expenses and test on it. Then, send conformation letter to conform the amount due.

For Non - Current Assets

The auditor should get yourself a list of fixed asset's expenditures that register under the client's company such as depreciation charges, loss or gain on the disposal of the predetermined asset, net publication value, revaluation amount and etc. The revaluation done should be back again by the data or documentation authorized by the professional. Check to invoice and agree to the explanation, price, particular date and etc. The physical existence and the health of the property should be check and determine whether it's located at company's premises. For disposal of predetermined assets, ensure that there is proper authorization and that loss or profit on removal is properly saved.


For Brief - Term Notes Payable

A loan provider conformation letter should be sent out to make inquiries loan balance status of the business. Auditors have to determine the principal and interest paid to check whether it adhere to the number in the balance sheet.

For Long - Term Debts

Review the loan arrangement and escort the attention to the relevant information to acquire the appropriate interest charged based on the nominal interest computation and auditor need to be making certain the interest stated in the income declaration same with the result of calculation.

For Income Tax Account

The records of the business deal of the company is required to keep for minimum amount 7 season required for legal reasons. Client is required to show records and support for every areas of company's tax return. For example, if your client cases itemized deductions, receipts for those deductions must be produced. Furthermore, to justifications for why the taxpayer felt that those deductions were genuine. Besides that, taxpayers must open their accounting methods to inspection and show that all of their income is at fact properly documented and claimed on the taxes return. This can be done through proper taking and classification for provision for taxation and deferred taxation.

As the fieldwork advances, the auditor discusses any significantfindingswith your client. Hopefully, the client can provide insights and work with the auditor to look for the most practical method of resolving the finding. Usually these marketing communications are dental. However, in more technical situations, memos and/or e-mails are written to be able to ensure full understanding by the client and the auditor. A whole lot of information is distributed via e-mail, of course, but there is certainly more face-to-face conversation. Besides that, I'd like to mention because of this communication question is language. Most communications with a greater group of people (and formal conferences) are presented in English; however it depends a lot on who's speaking if you will recognize that person. Also if it is merely me and, says, two other Indians, it's very likely that they move to Hindi or Kannada (local terms) without noticing. I then sometimes have to remind them to stay with English. Distinguishing between first and surnames is also impossible for me personally, same with deciding if the name is male or female - I just have to imagine or find some "neutral" ways to address or ask for people. In particular cases, we might also provide drafts of organizations charts, suggested forms or alterations to forms, financial data or other information, or drafts of studies and advice that later may be contained in to the formal audit survey. They are all considered casual communications between the auditor and your client. Their goal is to promote constructive communication and avoid misunderstandings. Our goal: NO SURPRISES.

Audit Summary / Financial Monitoring

Upon completion of the fieldwork, the auditor summarizes the audit results, conclusions, and recommendations essential for the audit record discussion draft. Write an overview memo to document the results of fieldwork. Conclude as to whether the information reported by the state of hawaii company in the Section 1512 information is accurate, reliable, and timely. The audit overview gives an overview of all work done bedding according to their topics. The audit synopsis template provides subject, the audit amount, the topic of the summation and of the work done linens, and the creation particular date. In addition to the work done bed linens, the audit summary also contains a listing of the observations and findings as well as a standard assessment and finish of the audit effect. Before writing the audit summary, auditors should concur the working paperwork which the summary is situated with their audit business lead.

Working Papers

Working paperwork are a vital tool of the audit job. They are the support of the audit thoughts and opinions. They hook up the client's accounting information and financials to the auditor's thoughts and opinions. They are thorough and provide many functions. The result of audit activities must be documented truthfully, consistently, clearly, and completely, with a comprehensible information of all material details. This involves both the items of a fieldwork activity and the task itself. This documents of fieldwork activities is known as "working documents" to express its reference to the task results. The essential requirements for proper paperwork apply to all sorts of fieldwork activities, although there are different types of documents, with respect to the mother nature of the audit. In addition to the working papers which can be obligatory, other documents can be created as optional extras; they contain information beyond the minimum information need. The working documents are an indication of the audit quality in general. This must be considered because concerns by different sets of addresses or their demands for information may often require usage of this documentation. Appropriately, the working documents may provide as discourse or information documents, for example for concerns from the Table, the unit requesting the audit, Internal Audit Management, the Audit Committee, or the external auditors. The preparation of working papers is subject to certain organizational requirements. Each auditor always has the main responsibility for planning the documents, both during and immediately after fieldwork. Despite the fact that the audit business lead and Audit Director have ultimate responsibility for quality assurance, each auditor has to prepare and maintain the working documents with the required attention to aspect. Working paperwork may be published by hand or joined directly into something (which is normally more expedient, because it makes it much easier to access the info again).


The third level of hauling an audit is to prepare an audit statement. After all of the evidence for every of that in the financial statement have been accumulated and proven, the senior audit and the audit assistant is going to check the concluding balance amount of the balance sheet and the trial balance with the ledger consideration if they are appropriate for each other and to ensure that each number is agreeing with the previous year audit consideration in order to get ready an operating trial balance and the working newspaper. After this all process has been done, our audit associate will put together an audit statement which expresses the opinion of the auditor, evidence of audit and suggestion for the information improvement.

Discussion Draft

In order to implement this process, first the auditors will discuss to prepare a draft for inside audit are accountable to outlining the audit's work, advice for the info that should provided and the timeframe to complete the article. The draft that prepared by the management office will show that who will responsible to implement the work, the action to be taken and the timeline to get the job done. Following the draft has been talking about, a meeting on the list of auditor will be organised in order to assign the work to the person selected for organizing the survey and in the mean time the draft will be sent to the particular auditor.

Formal Draft

The report will become the final survey if the response of the management is integrated with the audit record draft. The important information that within the article includes the title of the statement, the duty of the management and the auditor in setting up the record, the range paragraph that show the evidence of the evaluation and the accounting concepts use to prepare the article, the view paragraph which expresses the opinion of the auditor and if the financial statement is complying with the statutory requirement and the name, personal and address of the auditor who getting ready the report. That is to make certain that if there is any fault present in the report, it's the responsibility of this auditor to in charge with the case.

Final Report

After that, the auditor will show the final are accountable to the audit committee and the copies of the report will delivered to the mature auditor, the management team of the audit company and our customer, Merami Berhad to examine and receive the approval.

Client Response

In our survey, we could include or fastened your client response in the audit finding preceding to issuance of the final report. The client should focus on how report findings will be identified and include an implementation timetable in the response. However, some professionals may likely to make a decision which not to implement an audit recommendation and to allow the risks that may take place with an audit finding. For example, the treasury amounts are reconciled monthly instead of reconciled daily. The differences are taken care of and have been controlled since that time frame. The adjusting entries are made with proper paperwork and review.

Client Comments

In our report, we always include the clients comment on our Internal Audit's performance as it is area of the Internal Audit's self-evaluation program. The opinions has shown to be very beneficial to us as we improve our methods credited to clients' suggestion.


Followed-Up Review

These required certain actions taken to fix the audit survey results may be examined to guarantee the desired final result were achieved. For each item contained in the follow-up, review status information provided by management to ascertain if information addresses all parts of finding if a corrected time or revised due date has been provided. In this level, we will contact device management to acquire any absent information. We also assess action reported as taken in respond to each finding to see whether the finding has been satisfactorily corrected. If required, develop audit testing to show that the finding has been corrected predicated on the nature of the finding and reactions. The Director of Internal Audit or the auditor in charge of the follow-up review will prepare a memorandum for older management that notifies them that audit activities are underway and describes the follow-up process. This memo should include timeframes for the job, a copy of the outstanding findings associated with areas reporting to that senior administrator, a submission that they send out the findings to these areas and have the managers to provide Internal Audit with the information requested, a declaration that these responses were previously distributed as part of an audit record or close-out notice, and notification that the results will be reported to the Chancellor and Plank of Trustees.

Followed-Up Report

In the follow-up report, it lists every one of the actions taken by the client to resolve the initial report studies. Unresolved findings will also come in the follow-up survey and will add a brief explanation of the finding, the original audit recommendation, your client response, the current condition, and the continuing exposure to table of company. A discourse draft of every statement with unresolved findings is circulated to the client before the record is given. The follow-up review results will be circulated to the initial report recipient's officials as deemed appropriate.

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